Post-War Politics: Double Hard Squeeze
After the war a coalition consisting mainly of Conservatives and Liberals headed by the wartime Liberal Prime Minister David Lloyd George, campaigned together on a joint manifesto for post-war reconstruction (stressing policies to improve and expand social housing and expand educational opportunities, a process that had been stalled by the squeeze on civilian public spending during the war, while avoiding extra taxes on food or industrial raw materials). That coalition decisively won the so-called 'coupon' general election held shortly after the November 1918 armistice which ended the war with Germany.
The post-war government and its successors operated in a financial and economic environment that was far from benign, as a result of serious disruptions to international trade by the war, associated developments (such as the 1917 Russian Revolution and the formation of the Soviet Union) and lack of currency convertibility following the exchange controls and abandonment of the Gold Standard by several European countries. In the UK, a brief, unexpected post-war inflationary boom was swiftly and equally unexpectedly followed by a deflationary slump and mass unemployment. That in turn led to political turbulence in the form of electoral volatility and strikes against pay cuts, such as a three-month miners' strike and a general strike at the docks in 1921. That turbulence was compounded by rebellion in and the later secession from the UK of what is now the Irish Republic, and the associated partition of Ireland in 1922.
That was the background to the 'double hard squeeze' we identified in Chapter Two, in the two years after the war. The squeeze on spending at that time consisted entirely of deep cuts in defence expenditure arising from demobilization, while tax revenue increased because of the coalition government's policy of keeping income and profits tax rates high after the war, combined with the short post-war inflationary boom. Indeed, the government increased some tax rates above their wartime levels, while resisting demands from the left for a capital levy or wealth tax to pay down the war debt.
There seem to have been several reasons for this revenue squeeze. One was to correct a massive budget deficit; a second was to finance the huge cost of servicing the public debt incurred as a result of the war; and a third was to finance the enhanced social programmes associated with the coalition government's 1918 election promises of post-war reconstruction, notably in housing and education.
the war', and two years later McKenna's Conservative successor Andrew Bonar Law said, 'Excess Profits Duty is only to continue during the War' (HC Deb 16 July 1917, c.106).
The post-war government's first Chancellor (the Conservative Austen Chamberlain, who became leader of his party in 1921) described his political dilemma in his first budget speech in 1919:
I am called upon at one and the same time to remit or to repeal the taxation which was imposed [during the war]... and, not merely to resume the civil expenditure which was interrupted under the stress of war, but to provide the means for creating... a new heaven and a new earth;and the same people ... expect me at the same time to accomplish vast reductions in expenditure...2
As already mentioned, the work of cutting spending during this period was concentrated on defence (as demobilization led to big cuts in expenditure on the armed forces and the ministries of Munitions and Supply), not on cuts in civil spending. So although the estimates for FY 1919/20 comprised a reduction of nearly 60 per cent of the equivalent spending for FY 1918/19, and the estimates for 1920/21 represented a further reduction of some 35 per cent on those of 1919/20,3 none of that pain was felt in civilian services, meaning that the political cost of those spending cuts for the incumbents was relatively low, while the fiscal squeeze on the tax side was arguably more visible to citizens and voters and thus represented greater political costs. In his first budget in 1919, Chamberlain disappointed expectations of post-war cuts in income tax and supertax (the tax on the highest earnings) by retaining those taxes at the high wartime levels, and increased taxes on beer and spirits. As mentioned earlier, he broke the pledges of his wartime predecessors to abolish Excess Profits Duty after the war by retaining that tax for a further year, albeit at a reduced rate. While disappointing those on the left who were calling for a general wealth tax, he also sharply raised inheritance tax rates as an alternative approach to taxing wealth.
The government continued the fiscal squeeze in the following year's budget (1920). The budget deficit was reported as having fallen from ?1.6bn for FY 1918/19 to ?0.3bn for FY 1919-20, but taxes were raised again. The Excess Profits Duty was not only retained for a further year, but the rate went back up again to 60 per cent. On top of that, Chamberlain introduced a new Corporation Profits Tax of 5 per cent for all limited companies (intended to be the successor of EPD, which by that time was encouraging ways of artificially limiting profits). At the same time the rate of 'supertax' was increased and the standard rate of income tax kept at its wartime level of 33 per cent, along with more graduation of income tax. Further, Chamberlain raised postal charges, levied extra taxes on motoring (which was becoming more prevalent as more middle-income people acquired cars), doubled stamp taxes and increased taxes on tea, beer, wine, and spirits, arguing that these unpopular tax changes were needed for fiscal consolidation and to improve the UK's credit standing.4